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date: 19 March 2018

The Swiss Watch Industry

Summary and Keywords

The Swiss watch industry has enjoyed uncontested domination of the global market for more than two decades. Despite high costs and high wages, Switzerland is the home of most of the largest companies in this industry. Scholars in business history, economics, management studies, and other social sciences focused on four major issues to explain such success.

The first is product innovation, which has been viewed as one of the key determinants of competitiveness in the watch industry. Considerable attention has been focused on the development of electronic watches during the 1970s, as well as the emergence of new players in Japan and Hong Kong. Yet the rebirth of mechanical watches during the early 1990s as luxury accessories also can be characterized as a product innovation (in this case, linked to marketing strategy rather than pure technological innovation).

Second, brand management has been a key instrument in changing the identity of Swiss watches, repositioning them as a luxury business. Various strategies have been adopted since the early 1990s to add value to brands by using culture as a marketing resource.

Third, the evolution of the industry’s structure emphasizes a deep transformation during the 1980s, characterized by a shift from classical industrial districts to multinational enterprises. Concentration in Switzerland, as well as the relocation abroad of some production units through foreign direct investment (FDI) and independent suppliers, have enabled Swiss watch companies to control manufacturing costs and regain competitiveness against Japanese firms.Fourth, studying the institutional framework of the Swiss watch industry helps to explain why this activity was not fully relocated abroad, unlike most sectors in low-tech industries. The cartel that was in force from the 1920s to the early 1960s, and then the Swiss Made law of 1971, are two major institutions that shaped the watch industry.

The Swiss watch industry is an excellent example of a sector of the European manufacturing industry that was able to regain its international competitiveness after experiencing a severe crisis in the late 1970s and early 1980s. Its successful revival has attracted the attention of scholars in various fields of management and social sciences, who give explanations that are more complementary than contradictory. Four major approaches are introduced in this article: product innovation, brand management, industry structure, and institutional framework.

Although Switzerland has some of the highest prices and wages in the world, its watch industry has enjoyed uncontested domination of global markets since the 1990s. In 2014, Switzerland was the world’s largest watch exporter, with a value of $24.3 billion. The other positions of the top five exporting countries were occupied by Hong Kong ($10.4 billion), China ($5.3 billion), France ($2.8 billion), and Germany ($2.5 billion) (Federation of the Swiss Watch Industry, 2014).

To understand the reasons for this supremacy, one must go back a few decades and look at the overall dynamics of the global watch industry. There is little information available to carry out such a study from a long-term perspective. Most Swiss watch companies do not release such information because they are not listed or because they belong to diversified luxury groups, such as Compagnie Financière Richemont (hereafter Richemont) or LVMH, which do not give details about their operating companies. Moreover, there are no data about watch production in Switzerland and Hong Kong, unlike in Japan and the United States. Consequently, export statistics appear to be the best data for an international comparison despite the fact that this gives an overview at the level of the country, not the firm, and does not include sales in domestic markets.

Figure 1 shows the evolution of clock and watch exports for the top five exporting countries plus Japan between 1990 and 2014. The latter nation was added because it was the world’s number one nation in this industry from 1980 to 1985, and Japanese enterprises still play a key role in it (Donzé, 2016). Based on that fact, three main features in the evolution of clock and watch exports since 1990 can be highlighted.

Note: Not all data since 1990 are available; also, these numbers include exports of clocks and parts.

Source: COMTRADE.

First, even considering Switzerland’s domination of exports since the late 1980s, it has experienced especially rapid growth since 2000. Watch exports went from $4.9 billion in 1990 to $6.1 billion in 2000, $15.5 billion in 2010, and $24.3 billion in 2014. This expansion relies largely on the opening and the fast growth of the Chinese market in Swiss watches. Altogether, the share of Hong Kong and China rose from 16.9% in 1990 and 14.2% in 2000 to 26.5% in 2010 and 24.8% in 2014.

Second, Japan, which had been the world’s largest producer of watches in the early 1980s, experienced a continuous and steady decline after 1990. Its exports dropped from $2.3 billion in 1990 to $1.4 billion in 2000 and $1.1 billion in 2014, so that it is no longer in the top five as of 2006. Yet, although Japanese watch companies definitively lost their competitiveness during the early 21st century (Donzé, 2015), the decline of Japanese exports expresses the globalization of their production system above all. During the 1990s, they relocated plants to low-wage countries, especially China, due to competition from Swiss companies. The share of watches (including movements) produced abroad by Japanese watch companies grew from 17.8% in 1995 to 47.8% in 2010 (JCWA, 1995–2010).

Such globalization of supply chains and of firms’ organization is the third feature of this industry. This largely explains the development of exports by Hong Kong, China, France, and Germany. One must stress from the beginning that the data in Figure 1 includes reexport—that is, some watches may be counted several times. For example, Chinese exports are mostly sent to Hong Kong, which reexports them around the world. In 2014, reexport amounted to $2.5 billion (i.e., 47.2% of Chinese exports). Hence, the growth of exports by Hong Kong since 2000 is highly supported by watches imported from mainland China. Moreover, these figures include watch parts, which are also reexported within complete products. For example, in 2014, Switzerland was the first destination of French exports, the second for Hong Kong and Germany, the fifth for China, and the seventh for Japan.

Hence, the use of export statistics makes it possible to highlight some aspects of the general dynamics of this industry, especially the overwhelming domination of Switzerland since 2000, and the growth of Hong Kong and China. Yet, the globalization of firms and production systems requires other data to understand properly the basis of the competitiveness of companies. The ranking of watch companies published by Bank Vontobel is among the rare statistics to offer a general overview. Even if they are mostly based on estimations of gross sales, they give a general idea of who the companies behind export statistics are.

Table 1 lists the 20 largest watch companies in the world as of 2014, according to their gross sales and production centers. They represented 81.3% of the gross sales of the entire industry. Companies based in Switzerland had the largest share (56.1%), while Japanese companies had the second largest (9.5%) and American companies the third largest (7.6%). However, numerous firms in this ranking held subsidiaries in Switzerland although their headquarters were in other places, such as France, the United States, Spain, or Hong Kong. For example, LVMH is a French luxury group that held several Swiss luxury companies (particularly Hublot, Tag Heuer, and Zénith).

Moreover, a similar comment can be made regarding Hong Kong. Even if export statistics emphasized the territory’s major position as number two after Switzerland, there are almost no companies from Hong Kong in the top 20, Citychamp Watch & Jewelry Group being the only exception. Besides, this group is in this ranking in large part due to its Swiss subsidiaries (Corum, Eterna, and Rotary). However, many companies get their supplies for watchmaking in Hong Kong, even if they are based elsewhere in the world. Fossil, ranked number four, is a U.S. company that does not produce watches in the United States but has manufacturing subsidiaries in both Switzerland and Hong Kong.

Consequently, export statistics since 1990 and the global ranking of watch companies in 2014 offer different yet complementary looks at the dynamics of the global watch industry. They also highlight the particular position of Switzerland as the largest exporter and as the home of most of the companies in this industry. The next four sections of this article introduce the major approaches used by scholars to analyze the evolution of the Swiss watch industry: product innovation, brand management, industry structure, and institutional framework.

Product Innovation

Since the mid-19th century, the competitive advantage of watchmakers relied on their ability to manufacture products with a high level of accuracy (Landes, 1983). As Western societies became industrialized and urbanized, measuring time precisely became a necessity when running institutions and managing private companies. Moreover, watches were worn as fashion accessories, and adaptation to the tastes of local customers regarding size, design, and material was a major issue affecting a company’s ability to enter foreign markets successfully. The low cost of wages, in comparison with the United Kingdom and the United States, as well as an industry structure as a district (as discussed further later in this article), enabled Swiss watchmakers to provide high-quality goods and address all the needs of worldwide customers (Donzé, 2011a). The aesthetic dimension became particularly important in the beginning of the 20th century with the spread of wristwatches, while timekeepers previously had been mostly pocket watches (Béguelin, 1994). Wristwatches are an important example because they show that product innovation in the watch industry was related not only to technological issues, but also to design and image.

Nevertheless, historians give particular attention to technology when focusing on product innovation in mechanical watches during the 20th century. The ability to develop new kinds of mechanisms, such as self-winding movement (automatic watches), and new types of parts (such as artificial jewels, shock absorbers, and special alloys for springs) has been emphasized as a major strategy for remaining competitive (Pasquier, 2008). The atomized structure of the Swiss watch industry before the 1980s and the small size of companies were not obstacles to research and development (R&D), as firms founded collective institutions to carry out research (Perret, Beyner, Debély, & Tissot, 2000).

The major innovations in the watch industry during the 20th century were the advent of electronics and the invention of quartz watches. Landes (1983) characterizes the latter development as the “quartz revolution.” Quartz is a material that swings at a constant speed when stimulated by electric current, which makes it possible to obtain a precise measure of time. Its use for measuring time goes back to the interwar years, with the creation of the first quartz clock in 1927. However, Swiss, American, and Japanese entrepreneurs engaged in the manufacture of quartz clocks only after World War II.

The introduction of this technology in watches necessitated a miniaturization of the movement, which took time to achieve. The shift from the mechanical watch to the electronic watch was realized in several steps, with gradual innovations that made it possible to successively abandon mechanical parts of the movement for electronic parts. The main steps in this evolution were electric watches (invented by Lip in 1952), which replaced the barrel and spring with a battery as a source of energy; tuning-fork watches (by Bulova in 1960), which suppressed the balance spring with an electronic part; and finally the quartz watch, the time measurement system of which was completely electronic. Moreover, the display of time changed through the rise of electronics, including light-emitting diode (LED) and liquid crystal display (LCD) technology (Stephens & Dennis, 2000).

The development of quartz watches led to tough competition between Swiss and Japanese companies. As this technology enabled the production of high-precision goods, it appeared essential to master it in order to strengthen or gain competitive advantage. Although the first prototype was presented in 1967 by the Centre Électronique Horloger (CEH), a Swiss joint-stock company that carried out collective R&D for several watchmakers (including Ebauches, Omega, and Rolex), Seiko was the first company to launch a model on the market (in 1969). Moreover, the high level of concentration in the Japanese watch industry enabled it to shift quickly to the mass production of quartz watches, while the lack of rationalization in Switzerland was a major obstacle for such a change. In Japan, the production of quartz watches rose from 2.6 million pieces in 1975 to 149.3 million in 1985, and overtook the production of mechanical watches in 1979 (MITI, 1975–1985). In comparison, the export of quartz watches from Switzerland amounted to 1.3 million pieces in 1975 and 30.2 million in 1985. Quartz watches overtook mechanical watches in Switzerland in 1982 (Federation of the Swiss Watch Industry, 2014). Hence, the difference between Switzerland and Japan is essentially a matter of scale, not time. Even if they were slightly late to shift to electronics, Swiss watch companies really lost their competitive advantage due to the difficulty of achieving mass production.

However, quartz watches have been analyzed by scholars essentially as a product innovation. Particularly in Japan, researchers in the management of technology emphasized the fact that electronic technology made it possible to enter a new product life cycle, while the technology for mechanical watches was mature. This shift changed the conditions of competitiveness in the industry and enabled companies such as Seiko and Citizen to establish a new global leadership (Numagami, 1996; Sakakibara, 2005; Shintaku & Kuwada, 2008). Their capacity to mass-produce quartz watches enabled Japanese watchmakers to cut production costs and manufacture high-precision movements.

However, this new competitive advantage was not limited to Japanese watchmakers. Some entrepreneurs in Switzerland and Hong Kong understood that cheap and precise movements were an opportunity to launch a new kind of watch, conceived as a fashion accessory. The most famous is undeniably the Swatch, developed in the early 1980s and marketed in 1983. This plastic watch, produced entirely in Switzerland, was a product innovation based both on electronic technology and on a new use of the watch as a fashion accessory (Garel & Mock, 2012). It enjoyed great success in world markets between 1985 and 1995, hence supporting the transformation and growth of Société Suisse de Microélectronique et d’Horlogerie (SMH, renamed the Swatch Group in 1998, hereafter SG), which affected the entire Swiss watch industry (Donzé, 2014).

Despite this, most scholars argue that competitiveness in the watch industry has not been fostered by product innovation based on new technology since 2000. A change in the nature and the use of watches, together with the wide accessibility of accurate time through electronic devices such as computers and mobile phones, gave way to a new kind of product innovation. Jeannerat and Crevoisier (2011) argued that the use of culture as a resource and the implementation of a wide range of new marketing actions (e.g., sponsoring, events, and storytelling) led Swiss watch companies to develop “desirable products and narrations” (p. 32). They demonstrated that what they call “non-technological innovation,” or brand management (discussed further in the “Brand Management: Repositioning Toward Luxury” section of this article), lay at the core of the shift of the Swiss watch industry toward luxury after 2000. The return of mechanical watches (accounting for 41.5% of the value of exports of Swiss watches in 1990, 47.5% in 2000, and 71.9% in 2010) is hence explained as the result of a marketing strategy. Watches changed as products, but not through an innovation based on technology.

Although this view is now widely accepted, some scholars recently have called into question such a perspective, stressing that the comeback of mechanical watches after 2000 went along with a rapid development of R&D and innovation regarding new mechanisms and new materials. Munz (2015) showed, for example, that crafts play a major role in the ability of enterprises to rebuild their production capabilities for mechanical watches. Marti (2016) demonstrated the growth of patent registrations by watch companies since the late 2000s, notably in the field of mechanical watches. These technological innovations, however, can be considered to be driven by marketing strategy. Donzé (2014) stressed, through the case of the coaxial movement developed by Omega between 1999 and 2007 and equipped today in most of this brand’s mechanical watches, that such innovation must be understood within the broader context of the refocusing of brands on a few core messages—technical excellence and innovation being among them.

Brand Management: Repositioning Toward Luxury

Together with the organizational changes tackled in the next section, the repositioning of Swiss watches as luxury items through the implementation of a new brand management strategy has been at the core of the competitiveness of this industry since 1990. At first, to measure the transformation of the nature of this product, let us compare the evolution of the volume and value of Swiss watches exported since 1980. Figure 2 shows that after an increase of both volume and value during the years 1983–1993, obviously driven by the Swatch, the volume entered a phase of decline (from 50.9 million pieces in 1993 to 35.9 million in 2000), then stagnation (average of 32 million in 2000–2014). At the same time, the value entered a period of rapid growth after 2000. While it had risen from 2.9 billion Swiss francs (CHF) in 1980 to 5.9 billion CHF in 1990, it skyrocketed to 9.4 billion CHF in 2000 and peaked at 21.2 billion CHF in 2014. As for the average value of a single watch, this went from 95.2 CHF in the 1980s to 156 CHF in 1995, 387 CHF in 2005, and 609 CHF in 2014. It has quadrupled during the last two decades. Consequently, the export of a decreasing volume of watches for a rapidly increasing value embodies the shift to luxury. The new brand management implemented during the 1990s and 2000s made it possible to add more value to products.

Figure 2. Swiss export of watches and movements, volume in million pieces and value in millions CHF, 1980–2014.

Note: Value does not include parts.

Source: Federation of the Swiss Watch Industry.

The literature has identified two dimensions to the new brand management strategy of the Swiss watch industry since 1990. First, although most companies became larger and held several brands, it appeared necessary to manage not only single brands, but also a portfolio of brands. In order to make these brands competitive, companies needed to differentiate the identity of each brand and position them on specific and complementary segments. However, the characteristics of the portfolio of each group led to the adoption of particular strategies. For example, Terasaki and Nagasawa (2013) showed that Richemont was able to build a more exclusive image for its brands (e.g., Cartier, IWC, Jaeger-LeCoultre, Piaget, Vacheron Constantin) than LVMH (e.g., Hublot, Louis Vuitton, Tag Heuer, Zénith), because their brands’ identities were attached to craftsmanship, while the latter brands were linked to fashion. As for SG, the portfolio of which is characterized by a continuum of brands from entry-level (Swatch) to high-end (Breguet), it restructured its Executive Group Management Board, making it a platform for interbrand coordination and the adoption of a global strategy. Since 1990, this body has brought together representatives of the group’s main brands, the sales subsidiaries, and a few production officers, with a view to coordinate and manage the brand portfolio. SG held a total of 11 brands in 1990 (18 in 2006).

Second, the positioning and the image of each brand were deeply refined. Brands were refocused on a few key elements to make their identity clear and easy to understand. As in other sectors of the luxury industry, tradition, craftsmanship, heritage, and history were among the pillars of new brand identities (Munz, 2015). Swiss watches simultaneously embody technical excellence, the outcome of a long tradition, and an image of European lifestyle. To strengthen the image of tradition, Swiss watchmakers started to produce and sell mechanical watches again. In 2014, mechanical watches represented 26.6% of the volume of exports and 79.8% of the value (increasing from 19.5% and 41.5% in 1990, respectively). Narratives about tradition and heritage became a competitive advantage of the Swiss watch industry (Kebir & Crevoisier, 2008; Raffaelli, 2013).

Omega is a good example of the way that watch companies achieved refocus and repositioning. The new strategy was implemented by Jean-Claude Biver during the second half of the 1990s. Biver is one of the key entrepreneurs who moved the industry to luxury. A former manager of Omega, he left the company in 1983 to relaunch the brand Blancpain, featuring mechanical watches and a marketing campaign based on tradition and heritage. The global watch industry had shifted to electronics and quartz, and Biver proposed a completely new product: luxury accessories for which added value came from culture and heritage. This business was successful, and Blancpain was taken over by SG in 1992.

The same year, Biver was appointed to the Extended Group Management Board and took charge of the repositioning of Omega the following year. Three major elements were selected as the core identity of the brand (history, technical excellence, glamor), and all the actions of Omega were realized in order to refocus on them. The development of a specific new mechanism (co-axial movement), the organization of events (e.g., participation of American astronauts to remind people of the participation of Omega in the trip to the moon), the choice of ambassadors, and the organization of thematic sales by the auction company Antiquorum, among others, aimed at strengthening the brand image around a few core elements. The same strategy was implemented at the same time by other watch companies, SG, and other groups (Donzé, 2014).

Finally, retail began to be more and more integrated within brand management. While watches used to be distributed around the world through a network of independent importers, distributors, and retailers, luxury groups started to integrate distribution vertically in the 1990s. For example, SG invested in distributors in the United States (takeover of Borsack in 1999), China (stake in Hengdeli in 2005), and the Middle East (takeover of Rivoli in 2008); launched its own chain of luxury stores in 2001 (Tourbillon); and started to open a large number of flagship boutiques for some brands, particularly Omega. This company opened its first monobrand store in Zurich in 2000 and had a total of 178 shops by 2010, 71 of which were in mainland China (Donzé, 2014). As for Richemont, the number of monobrand stores for all its brands went from 320 in 1995 to 719 in 2000, and 1,370 in 2009. Consequently, the retail share of gross sales grew from 31.1% in 1996 to 54.9% in 2014 (Richemont, 1995–2014). The objective of such a new distribution strategy was twofold: first, it enabled companies to better control brand identity throughout the world, and second, the new strategy made it possible to internalize the high profits of retailing.

Industry Structure

Despite most scholars having focused primarily on marketing strategy since 2000, the transformation of organizational structure is also a major issue to look at to gain a proper understanding of the current Swiss domination of the watch industry. It needed to be cost competitive in the 1980s in order to overcome the competition from Japan, and cost remains an important challenge today, especially due to the high competition among Swiss groups.

The evolution since 1970 through 2013 of the number of enterprises and employees in this industry gives a general overview of organizational change. Figure 3 shows an evolution in three main phases. First, the years of crisis (1970–1985) were marked by the disappearance of more than half of all companies (dropping from 1,618 in 1970 to 634 in 1985) and nearly two-thirds of employment (from 89,448 persons in 1970 to 32,904 in 1985). These were the years during which Swiss companies lost their competitiveness against Japan, essentially due to their inability to mass-produce high-quality watches (Donzé, 2012).

Second, the following 15 years (1985–2000) were characterized by a stabilization of the number of firms (average of 581 companies) and a slight increase in the number of employees, such that the average number of employees per firm grew from 51.9 in 1985 to 64.9 in 2000, while it had been an average of 54.9 in 1970–1985. The less competitive firms had closed down by 1985, and the industry was taking on a stable structure.

Third, in the period 2000–2013, the number of firms was still stable (average of 589 companies), but there was a high growth of employment, from 37,334 people in 2000 to 57,286 in 2013. Hence, concentration was pursued throughout this period and employment rose to an average of 100.2 people per firm in 2013, a level never achieved in the past. Consequently, from the late 1990s onward, the Swiss watch industry has been characterized by a steady number of companies and increasing concentration.

How is one to interpret these changes? The Swiss watch industry was described by management scholars (Porter, 1990; Corolleur & Courlet, 2003), economic geographers (Maillat, Lecoq, Nemeti, & Pfister, 1995), and economic historians (Veyrassat, 1997; Linder, 2008) as a typical example of a cluster or industrial district since the late 18th century. The flexibility of this production system and its ability to produce goods answering all the needs and tastes of its customers were seen as major competitive advantages of Swiss watchmakers over other nations. Glasmeier (2000) has argued that industry structure varies between nations (craftsmanship in the United Kingdom, industrial district in Switzerland, and mass production in the United States, for instance) and that the specificity of the Swiss organizational structure lay at the core of its global competitiveness. Moreover, to prevent the transplantation of production abroad, the major watch companies, supported by the federal government and banks, organized a cartel during the interwar years (Boillat, 2014).

However, the case of the Japanese watch industry shows that industry structure is not fully linked to nations. In this country, the industry has been organized on the basis of a merger of elements from Switzerland (high-precision mechanical watches) and the United States (mass production of a narrow range of models), in what can be called a “hybrid production system” (Donzé, 2011b). Finally, historians emphasized that one of the objectives of the cartel set up during the interwar years was precisely to maintain the structure of the industrial district (Donzé, 2011a; Boillat, 2014).

Yet despite this wide literature, it seems difficult to recognize today the persistence of an industrial district in the Swiss watch industry. It experienced a deep mutation in the 1980s, expressed in Figure 3 by a growing increase of concentration. In 1983, following the advice of the consultant Nicolas G. Hayek, SG was created through the merger of the two largest watch companies in Switzerland. This event is undoubtedly the best illustration of concentration. That year, SG employed about 30% of the entire workforce in the Swiss watch industry and controlled most of the movements (mechanical and quartz) used throughout the industry (Donzé, 2014).

However, the most important changes in industry structure cannot be seen in Figure 3. They are related to the globalization of the Swiss watch industry. Two main features can be highlighted: the appearance of multinational enterprises (MNEs) and the construction of global value chains (GVCs).

Until the 1960s, there were basically no MNEs in the Swiss watch industry, as the cartel forbade the import and export of parts and controlled the activities of all watch companies (as discussed further later in this article). The only exceptions were a few subsidiaries of U.S. companies, which opened in Switzerland at the beginning of the 20th century, the most famous being Bulova Watch (Donzé, 2011a). A first wave of foreign direct investment (FDI) occurred in the 1960s and 1970s, following the end of the cartel. In order to cut production costs, Swiss watchmakers started to open production units abroad, mostly in Hong Kong and Singapore, for the manufacture of low-value-added parts (e.g., cases, straps, and dials) and the final assembly of watches (Blanc, 1988). The Federation of the Swiss Watch Industry itself engaged in technology transfer to Hong Kong. In 1966, it signed an agreement with entrepreneurs of the British colony to organize technical assistance related to the production of watch cases. Consequently, the import of cases in Switzerland quickly grew and the share of Swiss watches equipped with foreign cases grew from 6% in 1965 to 21% in 1975 (Donzé, 2011a).

This strategy also was adopted and developed by SG soon after its foundation. To cut production costs, it opened subsidiaries in Thailand (1986), Malaysia (1991), and China (1996) in succession. Staffing trends perfectly illustrate this globalization of the production system. The share of employees in Switzerland, which was 80% in 1983–1985, dropped to 71% in 1990, 56% in 2000, and 49% in 2014. Until the late 1990s, this internationalization primarily relied on the development of the plants in Asia. Indeed, the share of employees in Asia, glossed over in the 1980s, amounted to 21% in 1992 and to 33% in 1998 (Swatch Group, 1983–2014). However, since 2000, the globalization of staffing has relied on the verticalization of distribution (discussed further in the “Brand Management: Repositioning Toward Luxury” section of this article).

The emergence and growth of MNEs in the Swiss watch industry are also results of inward FDI by investors, companies, and groups engaged in the businesses of fashion and luxury. This trend can be observed as occurring since the late 1980s, with the creation of Richemont by the South African entrepreneur Anton Rupert following his takeover of Cartier, as well as the Swiss watch companies Piaget and Baume & Mercier (in 1988). However, such investments occurred even more after the late 1990s, once the Swiss watch industry successfully repositioned to luxury and showed how profitable this strategy was. The foreign firms LVMH (1999), Fossil (2001), Festina (2002), and China Haidian (2011), all among the 20 largest watch companies in 2014 (see Table 1), purchased companies in Switzerland (Donzé, 2014).

The second feature of the transformation of the industry’s organizational structure since 1990 is the implementation of new kinds of GVCs—that is, a globalization of the supply of watch parts without FDI by Swiss watch companies. Hong Kong and Thailand established themselves as major suppliers of parts for Swiss watch companies. While Thailand is strongly linked to Swiss FDI by SG and other companies such as Ronda, Hong Kong embodies the case of independent companies acting as intermediaries between manufacturers based in mainland China and Swiss watchmakers. The export of watch parts from Hong Kong to Switzerland grew in value from $325.9 million in 2000 to $992.2 million in 2014 (Global Trade Atlas, n.d.).

Institutional Framework

The mutation of industry structure and the change in marketing strategy are not enough to explain why the Swiss watch industry stayed in Switzerland. Historians (Pasquier, 2008) and scholars in social sciences (Fragomichelakis, 1994; Radov & Tushman, 2000; Tajeddini & Trueman, 2008; Tajeddini & Mueller, 2012; Raffaelli, 2013) have emphasized the presence of traditional know-how since the 18th century, which would have been used as the technical basis for the shift to luxury, as the comeback of mechanical watches was a major driver of this mutation. Yet such an assertion is insufficient to explain the permanence of Switzerland as a production center for watches despite its high costs. Technology and knowledge move across borders and follow the needs of firms (Jeremy, 1994; Donzé & Nishimura, 2013). A major issue, therefore, is to understand why watchmaking firms have stayed in Switzerland and consequently invested in human resources there. The answer can be found in the institutional framework, which has had a major impact on the Swiss watch industry since the interwar years, in two major periods.

At first, between the early 1920s and the first part of the 1960s, the Swiss watch industry was organized as a cartel that had been controlled by the state since 1934 (Donzé, 2011a; Boillat, 2014). There were essentially three objectives to cartelization when it was introduced: preventing relocation abroad through the export of parts (knock-down production abroad), maintaining the profitability of all enterprises, and reinforcing the organizational structure of an industrial district to avoid the development of a strong labor union and the risk of communism associated with industrial concentration. To fulfill these objectives, from 1924–1927, enterprises involved in the watch business were gathered in two associations (complete watchmakers and parts makers), and there also was a third holding company, Ebauches SA, for movement-blank makers (i.e., the producers of watch movements without regulating the organs, mainspring, dial, and hands). In 1928, these three groups signed conventions through which they engaged to do business exclusively with each other, to respect minimum prices, and not to export parts and movement-blanks.

This system was strengthened in the years that followed. In 1931, large watch companies, banks, and the federal state founded a new holding company, Allgemeine Schweizerische Uhrenindustrie AG (ASUAG; the General Swiss Watch Industry Company), which took over Ebauches and other parts makers. Next, in 1934, the federal state intervened directly, making the conventions binding. Consequently, from 1934 on, watch companies established in Switzerland were legally forbidden to acquire parts from a foreign company (with some exceptions related to a few firms established in France and Germany) or to export their own parts. Outward FDI was nonexistent except for sales subsidiaries.

The cartel was hence an institution that reinforced the territorial roots of the Swiss watch industry. Katzenstein (1987) argued that this watch cartel embodied a form of corporatism that was typical of European small economies. However, as cartel regulation prevented Swiss watch companies from rationalizing (restriction of mergers and acquisitions in Switzerland, ban on outward FDI for production, etc.), they were unable to implement mass production systems and started to lose their competitiveness in world markets during the 1950s. Therefore, the Swiss federal government decided to liberalize the watch industry and gradually dismantled the cartel between 1961 and 1965 (Uttinger & Papera, 1965).

The end of the cartel gave way to outward FDI and the development of outsourcing the manufacture of some parts to Asia (as discussed in the section “Industry Structure”). Yet liberalization was not total. For Swiss watchmakers, it was important to keep intact the reputation of their brands (and consequently the high quality of their movements) in world markets, as precision was the major determinant of competitive advantage for watches before the advent of quartz. They obtained from the federal government the introduction of a new institutional measure in 1962: technical control of watches. An official body was charged to select some watches and movements destined for export and to carry out an inspection to ensure that they met certain technical standards. In practice, however, this control affected less than 1% of watches and had no real impact on the industry (Donzé, 2011a).

Consequently, in 1971, the Swiss government adopted an ordinance limiting the use of the terms Switzerland and Swiss for watches (hereafter referred to as “the Swiss Made law”), which remains in force in the 21st century. The characteristic of this law is its very pragmatic nature, which provides both for the maintenance of production in Switzerland and the possibility of relocating some activities abroad. The criteria to legally define the “Swiss” watch were ambiguous, and they evolved until a reform carried out in 1995 specified that three elements of the production process had to be realized in Switzerland in order to use this label: a minimum of 50% of the parts of the movement (value), final assembly, and final inspection. Hence, this means that watchmakers can source up to half of the parts of the movements, as well as all external parts (case, dial, strap, and hands), from foreign producers.

In the 1970s, these measures were important to allow companies to cut production costs, thereby improving their competitiveness against Japanese watch companies, while ensuring the precision of the movement. Since the mid-1970s, the advent of quartz watches has gutted the Swiss Made law, as precision is no longer a matter meaningfully connected to production in Switzerland, nor even a competitive advantage any longer. The institution’s main contribution was to keep some employment in Switzerland during a period of crisis and restructuration.

Then, in the 1990s, in the context of the mutation of the industry to luxury, the Swiss Made law found a new meaning. Jeannerat and Crevoisier (2011) stressed that this label legitimizes “the image of the regional tradition and know-how for watch-making” (p. 38). It also regulates the entry of watches into the luxury world, which is strongly linked to Swiss products around the world, and explains inward FDI since the late 1990s (as discussed in the section “Industry Structure”). Since customers throughout the world consider luxury watches as Swiss, the luxury companies that want to offer watches among their accessories must invest in Switzerland and produce their watches in that country.

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